Icahn Speaks Out on Yahoo Truce

Activist investor Carl Icahn offered an explanation for suddenly dropping his proxy war and striking a compromise with Yahoo earlier this week, blaming the difficulty of commandeering a company's board of directors by shareholder vote.

In the end, Icahn suggested, he just didn't have the support.

"It is unfortunately extremely difficult to take control of a company," Icahn wrote in a blog post entitled, "How I Spent My Weekend."

"By the end of last week, I realized that although many large shareholders supported me and my slate for the board, they were nervous about having a complete change of control," Icahn said.

Chief among those investors was Legg Mason's Bill Miller, who last week announced that he would support Yahoo's incumbent directors. Legg Mason holds about 4.4 percent of Yahoo's shares.

The settlement with Icahn -- which will see the billionaire investor joining Yahoo's board -- seemed to dim the prospects of the company ultimately reaching a transaction with Microsoft, whose bid to buy the Web portal pioneer back in February set these events in motion.

Since then, Yahoo's dealings with first Microsoft, then Icahn, and finally Icahn and Microsoft together, have played out on a very public stage, with a healthy dose of rumors about alternative deals and rhetorical pugnacity.

Yahoo sale still in the cards?

Icahn has said that he still believes a sale of Yahoo or its search business "must be given full consideration," and expects that the compromise will leave him in a strong position to weigh in on a transaction.

Under the compromise with Yahoo, Icahn not only has secured himself a seat on the board of directors, but also will be able to recommend two additional members.

After Yahoo's annual meeting Aug. 1, the board will expand from nine to 11 members to incorporate the two additions. Icahn himself will replace Robert Kotick.

The two new directors will be chosen from a pool of candidates that includes the previously announced slate as well as Jonathan Miller, the former chairman and chief executive of AOL. Some industry observers, such as Jefferies analyst Youssef Squali, have suggested Icahn may be positioning Miller as a potential successor to CEO Jerry Yang.

In a brief letter (available as a PDF here) to several members of his alternative slate, Icahn thanked them for participation in the abortive proxy contest and reiterated an apparent promise to pay $25,000 to each person who does not land a spot on Yahoo's board following its expansion.

Icahn said that the agreement with Yahoo, which was finalized at 5 a.m. on Monday, gives him the right to sit on any committee organized to discuss "material transactions out of the ordinary course of business."

In his blog post, Icahn also called attention to another provision in the settlement agreement, which assures that the full board will meet to discuss "any meaningful transaction, including the strategy in dealing with that transaction."

The principle charge leveled by Icahn and other large investors, as well as several shareholder groups that have filed lawsuits against the Yahoo board, was that Yang and Chairman Roy Bostock were not acting in the best interest of shareholders.

While Icahn is hoping that the terms of the reconstituted board will give him the power to effect substantial structural change at Yahoo, analysts have their doubts.

"With three Icahn votes vs. eight Yahoo votes on the company's board, there is no way to force a sale of the company anymore," IDC's Karsten Weide wrote in a blog post. "Yahoo will not be sold to Microsoft, neither will its search business, and Jerry Yang will remain its CEO for the time being."

Yahoo reported soft earnings last night, but the Street gave it a pass on the sour macroeconomic climate and the immense distraction of dealing with Microsoft and Icahn.

"This quarter was neither weak enough for the stock to drop materially, allowing Microsoft to swoop in for the kill, nor strong enough to give Yahoo management boasting rights about the strength of their business," Jefferies' Squali wrote in a research note.

In contrast to IDC's Weide, Squali maintains his position that the sale to Microsoft is the most likely outcome.

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